How The Sternberg Case Impacts Violations of the Automatic Stay In Bankruptcy

26 Oct How The Sternberg Case Impacts Violations of the Automatic Stay In Bankruptcy

Violations of the automatic stay in bankruptcy are common. Most consumers who have seen their rights violated in bankruptcy have lawyers who will sue for money damages. For the most part, lawyers who sue creditors for violations of the automatic stay in bankruptcy also have the ability to get the creditor to pay their legal fees. This makes it easier for people to sue to enforce their rights without having to worry about the cost involved.

For people who live in California, Alaska, Arizona, Guam, Hawaii, Idaho, Montana, Oregon,Northern Mariana Islands and Washington State, that may no longer be the case.

On October 1, 2009, the Ninth Circuit Court of Appeals issued its decision in Sternberg v. Johnston (clicking the link will take you to a PDF of the decision).The court affirmed a violation of the automatic stay 11 USC 362, yet held that legal fees could only be recovered to the extent that they were incurred in connection with enforcing the automatic stay and remedying the violation, and not in the litigation of damages.

In other words, the lawyer could get paid for doing the work to make the creditor pay attention to the bankruptcy law. But once the creditor fell back in line, the lawyer couldn’t recover any more fees. Including, of course, the fees incurred in suing for fees and damages.

This decision now seems to over rule the Ninth Circuit BAP’s earlier decision inthe case of In re Walsh, Bkrtcy.N.D.Cal.1997, 208 B.R. 949, affirmed 219 B.R. 873, wherein it held that attorney fees asserted by a successful debtor in the prosecution of an appeal of a stay violation would also be entitled to recovery.

Thus, an individual debtor injured by a willful stay violation must be able to recover all damages arising from the willful stay violation, including any costs and attorney’s fees incurred on appeal.

So will this new decision from the Ninth Circuit stifle representation to debtors who prosecute these claims where no attorney fees are available for pursuing damages? Probably not.

To start, any prosecution of a violation of the automatic stay in bankruptcy over damages can usually be handled quickly via a motion as opposed to full blown adversary proceeding. To the extent an attorney seeks compensation for any motion practice solely related to the damages portion of the case, the attorney may simply substitute that portion of fees in exchange for a contingency fee basis in the final award.

Second, in most cases the bulk of attorney fees are actually incurred in attempting to force compliance with 362 on the creditor, not in determining damages. This is because such creditors often are ignorant of bankruptcy law and/or may technically believe the automatic stay does not apply to them. Thus, an initial correspondence from the debtor’s attorney is typically ignored and only after significant court intervention or final ruling will the creditor end violating the automatic stay. Thus in these circumstances, fees incurred in prosecuting the stay violation until the violation ceases at the end of the court proceeding are recoverable.

Third, 362 is not the only arrow in the debtor’s quiver of weapons to use against creditors who violate the automatic stay. Just as a discharge violation under 524 has its remedy under the Court’s contempt powers via 11 USC 105, so too do stay violations. Thus a debtor may desire instead to seek a contempt remedy under 105 instead of a private right of action under 362. Such a contempt remedy lies in the discretion of the court, and could include attorney fees in the prosecution of the contempt proceeding.

Indeed, the Ninth Circuit’s case of In re Dyer specifically provides that stay violations may be remedied via sanctions under the court’s 105 powers.

Finally, any prosecutions of 362 actions which used to expose creditors to attorneys fees in the damages portion of the case, still bring to the creditor the exposure of coercive sanctions. These coercive sanctions directly arise from compliance concerns that courts usually have where the automatic stay has been violated.

There is a price to be paid in lieu of being hauled into Bankruptcy Court and risk coercive sanctions. In the event such sanctions are entered, compliance costs could be substantial. This is because not only does a creditor now face additional attorney fees it pays in defense of such proceedings, but creating new policies and procedures with respect to the automatic stay of 362 and/or providing the court with evidence of the same could cost tens of thousands of dollars.

Indeed, locally in the Jacobsen case, the Court entered coercive sanctions to force a credit union to comply with privacy laws in the context of a proofs of claims.

Accordingly, that credit union had to create new policies, procedures, and maintenance protocols, to quickly and effectively eliminate its “glitches of disclosing social security numbers and other personal information in claims it filed, and provide evidence of the same to the court. These compliance costs were substantial and it is not uncommon to see compliance costs on large institutions amount to hundreds of thousands of dollars.

Thus while Sternberg v. Johnston has changed the playing field somewhat with respect to the prosecution of stay violations in terms of attorney fees, few cases should be impacted by its decision and creditor exposure to liability for the most part remains.

Image credit:timparkinson/Flickr

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